Impact of Unit Failure on Forward Contracting

A generating unit can sell its production in the pool facing the financial risk inherent to volatile pool prices. Alternatively, it can sell its production through the futures market at comparatively stable but smaller average prices. Unlike the pool, forward contracts involve an obligation to sell during a specified time period, and, if the unit fails, it should buy energy from the pool to meet its futures market commitments. Hence, taking into account its forced outage rate, the unit should determine the appropriate mix of pool and futures-market involvement so that its expected profit is maximized for a prespecified risk level on profit variability. Within this context, this paper analyzes the impact of the degree of unavailability of the generating unit on its forward contracting decisions. A detailed case study illustrates the analysis performed.